HOOKER FURNISHINGS Corp - Quarter Report: 2016 May (Form 10-Q)

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

---

 

FORM 10-Q

 

---

 

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended May 1, 2016

Commission file number 000-25349

(Exact name of registrant as specified in its charter)

Virginia	54-0251350
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

 

(Address of principal executive offices, zip code)

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated Filer    ☐	Accelerated filer ☒
Non-accelerated Filer  ☐    (Do not check if a smaller reporting company)	Smaller reporting company ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐     No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of June 3, 2016:

 

Common stock, no par value	11,556,316
(Class of common stock)	(Number of shares)

PART I. FINANCIAL INFORMATION
Item 1.	Financial Information	3
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	36
Item 4.	Controls and Procedures	36
PART II. OTHER INFORMATION
Item 6.	Exhibits	38
Signature		39

 

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

 

As of		May 1,				January 31,
		2016				2016
		(unaudited)
Assets
Current assets
Cash and cash equivalents		$	32,354			$	53,922
Trade accounts receivable, less allowance for doubtful        accounts of $3,464 and $1,032 on each respective date			61,760				28,176
Inventories			77,670				43,713
Prepaid expenses and other current assets			3,694				2,256
Total current assets			175,478				128,067
Property, plant and equipment, net			28,192				22,768
Cash surrender value of life insurance policies (see notes 3 and 8)			22,246				21,888
Deferred taxes			6,633				5,350
Intangible assets (see notes 3 and 9)			27,528				1,382
Goodwill (see notes 3 and 9)			23,398				-
Other assets			2,190				2,198
Total non-current assets			110,187				53,586
Total assets		$	285,665			$	181,653
Liabilities and Shareholders’ Equity
Current liabilities
Current portion of term loan		$	5,816			$	-
Trade accounts payable			26,275				9,105
Accrued salaries, wages and benefits			4,771				4,834
Income tax accrual			733				357
Customer deposits			4,069				797
Other accrued expenses			2,435				1,512
Total current liabilities			44,099				16,605
Long term debt (see note 10)			46,234				-
Deferred compensation (see note 11)			10,619				8,409
Pension plan (see note 11)			4,967				-
Income tax accrual			168				166
Other long-term liabilities			1,416				412
Total long-term liabilities			63,404				8,987
Total liabilities			107,503				25,592
Shareholders’ equity
Common stock, no par value, 20,000 shares authorized,       11,556 and 10,818 shares issued and outstanding on each date (see note 4)			39,434				18,667
Retained earnings			138,601				137,255
Accumulated other comprehensive income			127				139
Total shareholders’ equity			178,162				156,061
Total liabilities and shareholders’ equity		$	285,665			$	181,653

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

HOOKER FURNITURE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

		Thirteen Weeks Ended
		May 1,				May 3,
		2016				2015
Net sales		$	121,831			$	60,956
Cost of sales			95,232				44,581
Gross profit			26,599				16,375
Selling and administrative expenses			20,944				11,133
Intangible asset amortization (see notes 3 and 9)			1,654				-
Operating income			4,001				5,242
Other income, net			159				144
Interest expense, net			263				12
Income before income taxes			3,897				5,374
Income tax expense			1,397				1,902
Net income		$	2,500			$	3,472
Earnings per share
Basic		$	0.22			$	0.32
Diluted		$	0.22			$	0.32
Weighted average shares outstanding:
Basic			11,515				10,756
Diluted			11,540				10,781
Cash dividends declared per share		$	0.10			$	0.10

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

HOOKER FURNITURE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

		For the
		Thirteen Weeks Ended
		May 1,				May 3,
		2016				2015
Net Income		$	2,500			$	3,472
Other comprehensive (loss) income:
Amortization of actuarial (gain) loss			(17	)			45
Income tax effect on amortization			5				(17	)
Adjustments to net periodic benefit cost			(12	)			28
Total comprehensive Income		$	2,488			$	3,500

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

HOOKER FURNITURE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

		Thirteen Weeks Ended
		May 1,				May 3,
		2016				2015
Operating Activities:
Net income		$	2,500			$	3,472
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			2,785				620
Loss/(Gain) on disposal of assets			(15	)			41
Deferred income tax (benefit) expense			(1,276	)			826
Noncash restricted stock and performance awards			629				157
Provision for doubtful accounts			16				698
Changes in assets and liabilities:
Trade accounts receivable			13,553				1,224
Inventories			3,649				1,017
Income tax receivable			-				(178	)
Gain on life insurance policies			(181	)			(173	)
Prepaid expenses and other current assets			335				193
Trade accounts payable			(5,615	)			(1,869	)
Accrued salaries, wages, and benefits			(2,242	)			(1,494	)
Accrued income taxes			376				(1,368	)
Customer deposits			651				58
Other accrued  expenses			(639	)			154
Deferred compensation			(25	)			146
Other long-term liabilities			(40	)			15
Net cash provided by operating activities		$	14,461			$	3,539
Investing Activities:
Acquisition of Home Meridian		$	(86,062	)		$	-
Purchases of property and equipment			(703	)			(428	)
Proceeds received on notes for sale of assets			26				7
Premiums paid on life insurance policies			(174	)			(168	)
Net cash used in investing activities			(86,913	)			(589	)
Financing Activities:
Proceeds from long-term debt		$	60,000			$	-
Payments for long-term debt			(7,797	)			-
Debt issuance cost			(165	)			-
Cash dividends paid			(1,154	)			(1,079	)
Net cash provided by (used in) financing activities			50,884				(1,079	)
Net (decrease) increase in cash and cash equivalents			(21,568	)			1,871
Cash and cash equivalents - beginning of year			53,922				38,663
Cash and cash equivalents - end of quarter		$	32,354			$	40,534
Supplemental disclosure of cash flow information:
Cash paid for income taxes		$	2,308			$	2,611
Cash paid for interest, net			164				9
Non-cash transactions:
Acquisition cost paid in common stock		$	20,267			$	-
Increase in property and equipment through accrued purchases			44				-

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

HOOKER FURNITURE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar and share amounts in tables, except per share amounts, in thousands unless otherwise indicated)

(Unaudited)

For the Thirteen Weeks Ended May 1, 2016

1.	Preparation of Interim Financial Statements

The condensed consolidated financial statements of Hooker Furniture Corporation and subsidiaries (referred to as “we,” “us,” “our,” “Hooker” or the “Company”) have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”).  In the opinion of management, these statements include all adjustments necessary for a fair statement of the results of all interim periods reported herein.  All such adjustments are of a normal recurring nature.  Certain information and footnote disclosures prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) are condensed or omitted pursuant to SEC rules and regulations.  However, we believe that the disclosures made are adequate for a fair presentation of our results of operations and financial position.  These financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our annual report on Form 10-K for the fiscal year ended January 31, 2016 (“2016 Annual Report”). The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect both the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from our estimates. Operating results for the interim periods reported herein may not be indicative of the results expected for the fiscal year.

References in this document to “HMI” refer to Home Meridian International, the counter-party to the asset purchase agreement we entered into on January 6, 2016. References in this document to “Home Meridian” or “Home Meridian segment” refer to the newly acquired business operations and operating segment that was created upon the closing of the asset purchase agreement on February 1, 2016.

On February 1, 2016, we acquired substantially all of the assets and assumed certain liabilities of Home Meridian International, Inc. (“HMI”) for $86 million in cash and the issuance of 716,910 of our common stock valued at $20.3 million (such numbers include agreed upon post-closing working capital adjustments). Based on the way we manage, evaluate and internally report our operations, we determined that Home Meridian’s newly acquired operations will be reported as a separate operating segment. See notes 3 and 13 for additional details on the acquisition and our operating segments. The results of operations of Home Meridian are included in our results of operations beginning on February 1, 2016, the first day of our 2017 fiscal year. Conversely, since the acquisition was completed on the first day of the current fiscal year, comparable prior-year information for the Home Meridian segment is not included in the financial statements presented in this report. The acquisition is discussed in greater detail below in Note 3 Acquisition.

We adopted Accounting Standard’s Update (“ASU”) No. 2015-03, "Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs" in the first quarter of fiscal 2017. Prior to the issuance of this standard, debt issuance costs were required to be recorded as assets on the balance sheet. This update requires that debt issuance costs related to a debt liability be presented on the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts. This update does not change the recognition and measurement of debt issuance costs. Prior to the recent Home Meridian acquisition, we had no outstanding debt. Consequently, there are no costs to reclassify as a result of the adoption of this standard. However, we capitalized debt issuance costs related to the recent acquisition of the Home Meridian business during the fiscal 2017 first quarter and those unamortized costs are netted against our outstanding debt on our condensed consolidated balance sheets.

We adopted ASU No. 2015-16, "Business Combinations (Topic 805) Simplifying the Accounting for Measurement Period Adjustments", in the first quarter of fiscal 2017. This update requires that an acquirer in a business combination recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The effect on earnings of any changes in the provisional amounts must be calculated as if they occurred as of the acquisition date. The update also requires the acquirer to disclose the portion of the effect on earnings that would have been recorded in previous reporting periods if the adjustments to the provisional amounts had been recognized as of the acquisition date. This update must be adopted prospectively and may be early adopted for financial statements that had not been issued before the update's issuance date. The adoption of the update did not have a material effect on our Condensed Consolidated Income Statements in the fiscal 2017 first quarter but may in future quarters as management’s estimates and appraisals related to the Home Meridian acquisition are finalized.

The financial statements contained herein are being filed as part of a quarterly report on Form 10-Q covering the thirteen-week period (also referred to as “three months,” “three-month period,” “quarter,” “first quarter” or “quarterly period”) that began February 1, 2016 and ended May 1, 2016.  These financial statements also include the thirteen-week period that began February 2, 2015 and ended May 3, 2015.

References in these notes to the condensed consolidated financial statements of the Company to:

§	the 2017 fiscal year and comparable terminology mean the fiscal year that began February 1, 2016 and will end January 29, 2017; and

§	the 2016 fiscal year and comparable terminology mean the fiscal year that began February 2, 2015 and ended January 31, 2016.

 

The following table summarizes the preliminary estimates of the fair values of the identifiable assets acquired and liabilities assumed in the Acquisition as of May 1, 2016. The preliminary estimates of fair value of identifiable assets acquired and liabilities assumed are subject to revisions, which may result in adjustments to the preliminary values presented below, when management’s appraisals and estimates are finalized.

 

Fair value estimates of assets acquired and liabilities assumed
Purchase price consideration
Cash paid for assets acquired, including working capital adjustment		$	86,062
Value of shares issued for assets acquired			15,000
Value of shares issued for excess net working capital			5,267
Total purchase price		$	106,329
Accounts receivable		$	46,210
Inventory			37,606
Prepaid expenses and other current assets			1,776
Property and equipment			5,801
Intangible assets			27,800
Goodwill			23,398
Accounts payable			(22,681	)
Accrued expenses			(4,861	)
Pension plan liabilities and deferred compensation balances			(8,720	)
Total purchase price		$	106,329

 

Intangible assets, net, consist of three separately identified assets:

§	Home Meridian tradenames of $11.6 million consisting of:

o	Indefinite-lived intangible assets with an aggregate fair value of $11.4 million. The tradenames are not subject to amortization, but will be evaluated annually and as circumstances dictate, for impairment; and

o	Definite-lived intangible assets with an aggregate fair value of $200,000, which we expect to amortize over an eight-year period.

§	Home Meridian customer relationships which are definite-lived intangible assets with an aggregate fair value of $14.4 million. The customer relationships are amortizable and will be amortized over a period of eleven years; and

§	Home Meridian order backlog which is a definite-lived intangible assets with an aggregate fair value of $1.8 million which we will amortize over five months, with most of the expense recognized in the fiscal 2017 first quarter.

The following unaudited consolidated pro forma summary has been prepared by adjusting our historical data to give effect to the Acquisition as if it had occurred on February 1, 2015:

		13 Weeks Ended
(in millions except per share data)		May 1, 2016				May 3, 2015
						(Pro forma)
Net Sales		$	121,831			$	125,800
Net Income			2,500				2,690
Basic EPS		$	0.22			$	0.23
Diluted EPS		$	0.22			$	0.23

The unaudited consolidated pro forma financial information was prepared in accordance with existing standards and is not necessarily indicative of the results of operations that would have occurred if the Acquisition had been completed on the date indicated, nor is it indicative of our future operating results.

Material non-recurring adjustments excluded from the pro forma financial information in the table above consist of amortization of intangible assets, elimination of transaction related costs and an adjustment of the interest rate on short and long term debt to reflect the interest rates in the Company’s amended credit facility.

The unaudited pro forma results do not reflect events that either have occurred or may occur after the Acquisition, including, but not limited to, the anticipated realization of savings from operating synergies in subsequent periods. They also do not give effect to certain charges that we expect to incur in connection with the Acquisition, including, but not limited to, additional professional fees, employee integration, retention, potential asset impairments and accelerated depreciation and amortization.

We have incurred approximately $1.0 million in Acquisition related costs so far in fiscal 2017 and expect to incur an additional $400,000 during the remainder of fiscal 2017. These expenses are included in the “Selling and administrative expenses” line of our condensed consolidated statements of income.

5. Accounts Receivable

		May 1,				January 31,
		2016				2016
Trade accounts receivable		$	61,344			$	25,520
Receivable from factor			3,880				3,688
Allowance for doubtful accounts			(3,464	)			(1,032	)
Accounts receivable		$	61,760			$	28,176

“Receivable from factor” represents amounts due with respect to factored accounts receivable. Under our current factoring agreement, which continues to serve Bradington-Young (BY), invoices for domestically produced BY upholstery products are generated and transmitted to our customers, with copies to the factor on a daily basis, as products are shipped to our customers. The factor collects the amounts due and remits collected funds to us semi-weekly, less factoring fees. We retain ownership of the accounts receivable until the invoices are 90 days past due. At that time, the factor pays us the net invoice amount, less factoring fees, and takes ownership of the accounts receivable. The factor is then entitled to collect the invoices on its own behalf and retain any subsequent remittances. The invoiced amounts are reported as accounts receivable on our condensed consolidated balance sheets, generally from the date the merchandise is shipped to our customer until payment is received from the factor.

A limited number of our accounts receivable for our domestically produced upholstery are factored with recourse to us. The amounts of these receivables at May 1, 2016 and January 31, 2016 were $275,000 and $255,000, respectively. If the factor is unable to collect the amounts due, invoices are returned to us for collection. We include an estimate of potentially uncollectible receivables in our calculation of our allowance for doubtful accounts.

6.	Inventories

		May 1,				January 31,
		2016				2016
Finished furniture		$	88,881			$	55,120
Furniture in process			960				727
Materials and supplies			8,181				7,994
Inventories at FIFO			98,022				63,841
Reduction to LIFO basis			(20,352	)			(20,128	)
Inventories		$	77,670			$	43,713

 

		Depreciable Lives			May 1,				Jan 31,
		(In years)			2016				2016
Buildings and land improvements		15 - 30			$	22,946			$	22,777
Computer software and hardware		3 - 10				18,460				16,137
Machinery and equipment		10				5,302				4,864
Leasehold improvements		5				9,085				2,817
Furniture and fixtures		3 - 8				2,274				1,453
Other		5				555				546
Total depreciable property at cost						58,622				48,594
Less accumulated depreciation						33,276				27,739
Total depreciable property, net						25,346				20,855
Land						1,067				1,067
Construction-in-progress						1,779				846
Property, plant and equipment, net					$	28,192			$	22,768

 

 

At May 1, 2016, construction-in-progress consisted of approximately $541,000 of expenditures related to our ongoing Enterprise Resource Planning (“ERP”) conversion efforts and approximately $1.2 million of expenditures related to various other projects to enhance our facilities and operations.

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the applicable measurement date. We use a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:

Level 1, defined as observable inputs such as quoted prices in active markets for identical assets and liabilities;

Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and

Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

 

		Fair value at May 1, 2016*																Fair value at January 31, 2016
Description		Level 1				Level 2				Level 3				Total				Level 1				Level 2				Level 3				Total
														(In thousands)
Assets measured at fair value
Company-owned life insurance		$	-			$	22,246			$	-			$	22,246			$	-			$	21,888			$	-			$	21,888
Mortgage note receivable			-				-				1,573				1,573				-				-				1,575				1,575
Pension plan assets			11,585				-				-				11,585				-				-				-				-

During the fiscal 2017 first quarter, we recorded both non-amortizable and amortizable intangible assets as a result of our acquisition of Home Meridian on February 1, 2016. The acquisition-related trade names, customer relationships and order backlog have been assigned preliminary fair values subject to additional analysis during the measurement period as we continue to gather information. Details of these new intangible assets, as well as previously recorded intangible assets assigned to our Upholstery and All other operating segments, are as follows:

				May 1,				January 31,
Non-amortizable Intangible Assets		Segment		2016				2016
Goodwill		Home Meridian		$	23,398			$	-
Trademarks and trade names - Home Meridian		Home Meridian			11,400				-
Trademarks and trade names - Bradington-Young		Upholstery			861				861
Trademarks and trade names - Sam Moore		Upholstery			396				396
URL- Homeware.com		All other			125				125
Total non-amortizable assets					36,180				1,382

All of our amortizable intangible assets are recorded in our Home Meridian segment. The carrying amounts and changes therein of those amortizable intangible assets were as follows:

		Amortizable Intangible Assets
		Customer
		Relationships				Backlog				Trademarks				Totals
Balance at January 31, 2016		$	-			$	-			$	-			$	-
Intangibles- HMI acquisition			14,400				1,800				200				16,400
Amortization			(327	)			(1,321	)			(6	)			(1,654	)
Balance at May 1, 2016		$	14,073			$	479			$	194			$	14,746

The estimated amortization expense associated with our amortizable intangible assets is expected to be as follows:

Fiscal Year		Amount
Remainder of 2017		$	1,480
2018			1,334
2019			1,334
2020			1,334
2021			1,334
Thereafter			7,930
		$	14,746

The expected amortization expense will be approximately $815,000 in the fiscal 2017 second quarter and approximately $335,000 in each of the fiscal 2017 third and fourth quarters.

On February 1, 2016, we entered into an amended and restated loan agreement (the “Loan Agreement”) with Bank of America, N.A. (“BofA”) in connection with the completion of the Home Meridian acquisition. Also on February 1, 2016, we borrowed in full the amounts available under the Unsecured Term Loan (the “Unsecured Term Loan”) and the Secured Term Loan (the “Secured Term Loan”) in connection with the completion of this acquisition.

Details of the individual credit facilities provided for in the Loan Agreement are as follows:

 

§	Unsecured revolving line of credit. The Loan Agreement increased the amount available under our existing unsecured revolving credit facility to $30 million and increased the sublimit of the facility available for the issuance of letters of credit to $4 million. Amounts outstanding under the revolving facility bear interest at a rate, adjusted monthly, equal to the then current LIBOR monthly rate plus 1.50%. We must also pay a quarterly unused commitment fee that is based on the average daily amount of the facility utilized during the applicable quarter;
§	Unsecured Term Loan. The Loan Agreement provided us with a $41 million unsecured term loan (the “Unsecured Term Loan”). Any amount borrowed under the Unsecured Term Loan will bear interest at a rate, adjusted monthly, equal to the then current LIBOR monthly rate plus 1.50%. We must repay any principal amount borrowed under Unsecured Term Loan in monthly installments of approximately $490,000, together with any accrued interest, until the full amount borrowed is repaid or until February 1, 2021, at which time all amounts outstanding under the Unsecured Term Loan will become due and payable; and
§	Secured Term Loan. The Loan Agreement provided us with a $19 million term loan (the “Secured Term Loan”) secured by a security interest in certain Company-owned life insurance policies granted to BofA under a security agreement, dated as of February 1, 2016 (the “Security Agreement”). Any amount borrowed under the Secured Term Loan will bear interest at a rate, adjusted monthly, equal to the then current LIBOR monthly rate plus 0.50%.We must pay the interest accrued on any principal amount borrowed under the Secured Term Loan on a monthly basis until the full principal amount borrowed is repaid or until February 1, 2021, at which time all amounts outstanding under the Secured Term Loan will become due and payable. BofA’s rights under the Security Agreement are enforceable upon the occurrence of an event of default under the Loan Agreement.

 

We may prepay any outstanding principal amounts borrowed under either the Unsecured Term Loan or the Secured Term Loan in full or in part on any interest payment date without penalty. Since the closing date we have made unscheduled payments of $5.0 million on the Unsecured Term Loan and $1.8 million on the Secured Term Loan, in addition to the regularly-scheduled debt service payments required by the Loan Agreement.

 

Additionally, we incurred $165,000 in debt issuance costs in connection with our terms loans. These costs are amortized over the life of the loan using the interest method and are included in the “interest expense” line of our condensed consolidated income statements. Unamortized debt issuance costs are netted against the carrying value of our term loans on our condensed consolidated balance sheets. As of May 1, 2016, unamortized loan costs of $153,000 were netted against the carrying value of our term loans on our condensed consolidated balance sheets.

The Loan Agreement also included customary representations and warranties and requires us to comply with customary covenants, including, among other things, the following financial covenants:

§	Maintain a tangible net worth of at least:

□	As of the fiscal year-end January 31, 2016, $105.0 million plus 40% of net income before taxes earned in the 2016 fiscal year; and

□	As of the end of each subsequent fiscal year, the minimum tangible net worth required for the prior fiscal year, plus 40% of net income, before taxes, earned in each subsequent fiscal year.

§	Maintain a ratio of funded debt to EBITDA not exceeding:

□	2.50:1.0 through August 31, 2017;

□	2.25:1.0 through August 31, 2018; and

□	2.00:1.00 thereafter.

§	A basic fixed charge coverage ratio of at least 1.25:1.00; and

§	Limit capital expenditures to no more than $15.0 million during any fiscal year with expenditures to acquire fixed assets pursuant to the Acquisition being excluded for the fiscal year in which the Acquisition occurs.

The Loan Agreement also limits our right to incur other indebtedness, make certain investments and create liens upon our assets, subject to certain exceptions, among other restrictions. The Loan Agreement does not restrict our ability to pay cash dividends on, or repurchase, shares of our common stock, subject to our compliance with the financial covenants discussed above, if we are not otherwise in default under the Loan Agreement.

We were in compliance with each of these financial covenants at May 1, 2016 and expect to remain in compliance with existing covenants through fiscal 2017 and for the foreseeable future.

As of May 1, 2016, we had an aggregate $28.2 million available under our revolving credit facility to fund working capital needs. Standby letters of credit in the aggregate amount of $1.8 million, used to collateralize certain insurance arrangements and for imported product purchases, were outstanding under the revolving credit facility as of May 1, 2016.  There were no additional borrowings outstanding under the revolving credit facility on May 1, 2016.  Any principal outstanding under the revolving credit facility is due July 31, 2018.

Approximately $700,000 of the $1.8 million of our outstanding letters of credit relates to a letter of credit provided for our former captive insurance arrangement. That arrangement officially ended during the fiscal 2017 first quarter and we expect the related letter of credit to be released during the fiscal 2017 second quarter.

We maintain a supplemental retirement income plan (“SRIP”) for certain former and current executives of Hooker Furniture Corporation. Additionally, we assumed Home Meridian’s pension plan and other retirement plan liabilities upon completion of the Home Meridian acquisition on February 1, 2016. Home Meridian’s legacy pension plan obligations relate to Pulaski Furniture Corporation, one of two entities combined to form HMI. These legacy pension plan obligations include:

§	the Pulaski Furniture Corporation Supplemental Executive Retirement Plan (“SERP”) for certain former executives. The SERP is an unfunded plan and all benefits are paid solely out of our general assets; and

§	the Pulaski Furniture Corporation Pension Plan (“Pension Plan”) for former Pulaski Furniture Corporation employees.

The SRIP, SERP and Pension plans are all “frozen” and we do not expect to add additional employees to any of these plans in the future. Pension plan assets include a range of mutual fund asset classes and are measured at fair value using level one inputs, which are quoted prices in active markets.

The consolidated liability for our pension plan obligations at May 1, 2016 and January 31, 2016 were $16.8 million and $8.2 million, respectively, and are shown in our condensed consolidated balance sheets as follows:

 

		May 1,				January 31,
		2016				2016
Accrued salaries, wages and benefits (current portions)
Hooker SRIP		$	354			$	354
Home Meridian SERP			262				-
Home Meridian Pension			1,191				-
Total current portion		$	1,807			$	354
Long-term portions
Hooker SRIP		$	7,895			$	7,799
Home Meridian SERP			2,169				-
Total deferred compensation*			10,064				7,799
Home Meridian Pension Plan			4,967				-
Total deferred compensation and pension plans			15,031			$	7,799
Consolidated pension liabilities		$	16,838			$	8,153

 

*Total Deferred Compensation shown in the Long-Term Liabilities section of our Condensed Consolidated Balance Sheets is $10.6 million at May 1, 2016 and $8.4 million at January 31, 2016. These totals include the SRIP and SERP amounts shown in the table above, as well as miscellaneous additional long-term compensation-related items unrelated to these plans.

Components of net periodic benefit cost for the SRIP, SERP and pension plans are included in our condensed consolidated statements of income under selling and administrative expenses.

		Thirteen Weeks Ended
		May 1,				May 3,
		2016				2015
Net periodic benefit costs
SRIP:
Service cost		$	94			$	101
Interest cost			85				72
Actuarial loss (gain)			(18	)			45
Total SRIP			161				218
SERP:
Interest cost			22				-
Total SERP			22				-
Pension Plan:
Interest cost			188				-
Expected return on pension plan assets			(197	)
Expected administrative expenses			70				-
Total Pension Plan			60				-
Consolidated net periodic benefit costs		$	244			$	218

The expected long-term rate of return on Pension Plan assets is 7.0% as of the Plan’s most recent valuation date of February 2, 2016.

We refer you to the discussion of Earnings Per Share in Note 1-Summary of Significant Accounting Policies, in the financial statements included in our 2016 Annual Report, for additional information concerning the calculation of earnings per share.

We have issued restricted stock awards to non-employee members of the board of directors since 2006 and restricted stock units (RSUs) to certain senior executives since fiscal 2012 under the Company’s Stock Incentive Plan. Each RSU entitles an executive to receive one share of the Company’s common stock if the executive remains continuously employed with the Company through the end of a three-year service period. The RSUs may be paid in shares of our common stock, cash or both at the discretion of the Compensation Committee of our board of directors. We expect to continue to grant these types of awards annually in the future. The following table sets forth the number of outstanding restricted stock awards and RSUs, net of forfeitures and vested shares, as of the fiscal period-end dates indicated:

		May 1,				January 31,
		2016				2016
Restricted shares			30				25
Restricted stock units			20				13
			50				38

All restricted shares and RSUs awarded that have not yet vested are considered when computing diluted earnings per share. The following table sets forth the computation of basic and diluted earnings per share:

		Thirteen Weeks Ended
		May 1,				May 3,
		2016				2015
Net income		$	2,500			$	3,472
Less: Unvested participating restricted stock dividends			3				3
Net earnings allocated to unvested participating restricted stock			6				9
Earnings available for common shareholders			2,491				3,460
Weighted average shares outstanding for basic earnings per share			11,515				10,756
Dilutive effect of unvested restricted stock and RSU awards			25				25
Weighted average shares outstanding for diluted earnings per share			11,540				10,781
Basic earnings per share		$	0.22			$	0.32
Diluted earnings per share		$	0.22			$	0.32

The increase in the number of shares is primarily due to the issuance of 716,910 shares of our common stock as a result of the Home Meridian acquisition on February 1, 2016.

13.              Income Taxes

We recorded income tax expense of $1.4 million for the fiscal 2017 first quarter compared to $1.9 million for the comparable prior year period.  The effective tax rates for the fiscal 2017 and 2016 first quarters were 35.8% and 35.4%, respectively.  Our effective tax rate was higher in the fiscal 2017 first quarter as a result of a higher state rate due to the creation of tax nexus in additional states as part of the Home Meridian acquisition as well as the reduced impact of certain permanent differences as a result of the acquisition.

The net unrecognized tax benefits as of May 1, 2016 and January 31, 2016, which, if recognized, would affect our effective tax rate are $168,000 and $221,000, respectively.

Tax years ending February 3, 2013, through January 31, 2016 remain subject to examination by federal and state taxing authorities. An examination of the fiscal 2013 with federal taxing authorities was completed during fiscal 2016 with no changes. An examination of our North Carolina state tax returns for fiscal year 2012 and 2013 was completed during the quarter with no material changes.

For financial reporting purposes, we are organized into four operating segments – Hooker Casegoods, Home Meridian, Upholstery and an All Other segment, which includes H Contract and Homeware. Based on the way in which we manage, evaluate and internally report our operations, we determined that Home Meridian’s newly acquired operations will be reported as a separate operating segment. The following table presents segment information for the periods, and as of the dates, indicated:

 

		Thirteen Weeks Ended
		May 1, 2016								May 3, 2015
						% Net Sales								% Net Sales
Net Sales
Hooker Casegoods		$	32,929				27.0	%		$	38,483				63.1	%
Upholstery			21,893				18.0	%			21,303				34.9	%
Home Meridian			64,976				53.3	%			-
All other			2,033				1.7	%			1,332				2.2	%
Intercompany eliminations			-								(162	)
Consolidated		$	121,831				100.0	%		$	60,956				100.0	%
Gross Profit & Margin
Hooker Casegoods		$	10,154				30.8	%		$	11,301				29.4	%
Upholstery			5,076				23.2	%			4,718				22.1	%
Home Meridian			10,710				16.5	%			-
All other			656				32.3	%			351				26.4	%
Intercompany eliminations			3								5
Consolidated		$	26,599				21.8	%		$	16,375				26.9	%
Operating Income & Margin
Hooker Casegoods		$	2,081				6.3	%		$	4,101				10.7	%
Upholstery			1,763				8.1	%			1,447				6.8	%
Home Meridian			88				0.1	%			-
All other			67				3.3	%			(311	)			-23.3	%
Intercompany eliminations			2								5
Consolidated		$	4,001				3.3	%		$	5,242				8.6	%
Capital Expenditures
Hooker Casegoods		$	380							$	369
Upholstery			34								59
Home Meridian			289								-
All other			-								-
Consolidated		$	703							$	428
Depreciation & Amortization
Hooker Casegoods		$	536							$	397
Upholstery			229								221
Home Meridian			2,018
All other			2								2
Consolidated		$	2,785							$	620

		As of May 1, 2016				% Total				As of January 31, 2016				% Total
Total Assets						Assets								Assets
Hooker Casegoods		$	122,396				42.8	%		$	146,794				80.8	%
Upholstery			34,561				12.2	%			34,010				18.7	%
Home Meridian			127,818				44.7	%			-				0.0	%
All other			902				0.3	%			863				0.5	%
Intercompany eliminations			(12	)							(14	)
Consolidated		$	285,665				100.0	%		$	181,653				100.0	%

 

 

In September 2009, U.S. Customs and Border Protection (“CBP”) issued an audit report asserting that we had not paid all required antidumping duties due with respect to certain bedroom furniture we imported from China. In February 2015, CBP assessed a civil penalty of approximately $2.1 million and unpaid duties of approximately $500,000 on the matter.  In December 2015, in response to our petition to eliminate or modify the assessment, CBP revised the proposed penalty to approximately $1.7 million, while leaving the duty assessment at approximately $500,000.  We continue to assert that no antidumping duties are due and that there is no basis for the imposition of a penalty.  We intend to vigorously defend against the penalty. In the opinion of management, the ultimate disposition of this matter will not have a material adverse effect on our consolidated financial position, results of operations, or liquidity.

 

 

 

On June 6, 2016, our board of directors declared a quarterly cash dividend of $0.10 per share, payable on June 30, 2016 to shareholders of record at June 16, 2016.

All references to the “Company,” “we,” “us” and “our” refer to Hooker Furniture Corporation and its consolidated subsidiaries, unless specifically referring to operating segment information. All references to specific quarter periods are referring to our fiscal quarters. Our quarterly periods are based on thirteen-week “reporting periods” (which end on a Sunday) rather than quarterly periods consisting of three calendar months. As a result, each quarterly period generally is thirteen weeks, or 91 days, long, except as noted below. All references to the years 2017, 2016, 2015 and other years are referring to our fiscal years, unless otherwise stated. Our fiscal years end on the Sunday closest to January 31. In some years (generally once every six years) the fourth quarter will be fourteen weeks long and the fiscal year will consist of fifty-three weeks. The 2013 fiscal year that ended on February 3, 2013 was a 53-week fiscal year.

Forward-Looking Statements

Certain statements made in this report, including statements in this section and in the notes to the consolidated financial statements included in this report, are not based on historical facts, but are forward-looking statements.  These statements reflect our reasonable judgment with respect to future events and typically can be identified by the use of forward-looking terminology such as “believes,” “expects,” “projects,” “intends,” “plans,” “may,” “will,” “should,” “would,” “could”  or “anticipates,” or the negative thereof, or other variations thereon, or comparable terminology, or by discussions of strategy.  Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements.  Those risks and uncertainties include but are not limited to:

§

general economic or business conditions, both domestically and internationally, and instability in the financial and credit markets, including their potential impact on our (i) sales and operating costs and access to financing or (ii) customers and suppliers and their ability to obtain financing or generate the cash necessary to conduct their respective businesses;

§

the risks related to the recent acquisition of substantially all of the assets and certain liabilities of Home Meridian International, Inc., (“HMI”) including deal-related costs to be recognized in fiscal 2017, integration costs, costs related to acquisition debt, including maintaining HMI’s existing customer relationships, debt service costs, interest rate volatility, the use of operating cash flows to service debt to the detriment of other corporate initiatives or strategic opportunities, financial statement charges related to the application of current accounting guidance in accounting for the acquisition, the recognition of significant additional depreciation and amortization expenses by the combined entity,  the loss of key employees from HMI, the ongoing costs related to the assumption of HMI’s pension liabilities, the disruption of ongoing businesses or inconsistencies in standards, controls, procedures and policies across the companies which could adversely affect our internal control or information systems and the costs of bringing them into compliance and failure to realize benefits anticipated from the acquisition;

§	the risks specifically related to the Home Meridian segment’s operations including significant concentrations of its sales and accounts receivable in only a few customers;

§	achieving and managing growth and change, and the risks associated with new business lines, acquisitions, restructurings, strategic alliances and international operations;

 

§	our ability to successfully implement our business plan to increase sales and improve financial performance;

§	changes in actuarial assumptions, the interest rate environment and the return on plan assets related to the Home Meridian segment’s legacy Pension Plan, which can affect future funding obligations, costs and plan liabilities;

§	the cost and difficulty of marketing and selling our products in foreign markets;

§	disruptions involving our vendors or the transportation and handling industries, particularly those affecting imported products from China and Vietnam, including customs issues, labor stoppages, strikes or slowdowns and the availability of shipping containers and cargo ships;

§	the interruption, inadequacy, security breaches or integration failure of our information systems or information technology infrastructure, related service providers or the internet;

§	disruptions affecting our Virginia, North Carolina or California warehouses, our Virginia or North Carolina corporate or divisional administrative facilities or our representative offices in China and Vietnam;

§	when or whether our new business initiatives, including, among others, H Contract and Homeware, meet growth and profitability targets;

§	price competition in the furniture industry;

§	changes in domestic and international monetary policies and fluctuations in foreign currency exchange rates affecting the price of our imported products and raw materials;

§	the cyclical nature of the furniture industry, which is particularly sensitive to changes in consumer confidence, the amount of consumers’ income available for discretionary purchases, and the availability and terms of consumer credit;

§	risks associated with the cost of imported goods, including fluctuation in the prices of purchased finished goods and transportation and warehousing costs;

§	risks associated with domestic manufacturing operations, including fluctuations in capacity utilization and the prices and availability of key raw materials, as well as changes in transportation, warehousing and domestic labor costs and environmental compliance and remediation costs;

§	the direct and indirect costs associated with the implementation of our Enterprise Resource Planning system, including costs resulting from unanticipated disruptions to our business;

§	adverse political acts or developments in, or affecting, the international markets from which we import products, including duties or tariffs imposed on those products;

§	risks associated with distribution through third-party retailers, such as non-binding dealership arrangements;

§	capital requirements and costs;

§	competition from non-traditional outlets, such as catalog and internet retailers and home improvement centers;

§	changes in consumer preferences, including increased demand for lower-quality, lower-priced furniture due to, among other things, declines in consumer confidence, amounts of discretionary income available for furniture purchases and the availability of consumer credit;

§	higher than expected costs associated with product quality and safety, including regulatory compliance costs related to the sale of consumer products and costs related to defective or non-compliant products; and

§	higher than expected employee medical costs.

Our forward-looking statements could be wrong in light of these and other risks, uncertainties and assumptions. The future events, developments or results described in this report could turn out to be materially different. Any forward-looking statement that we make speaks only as of the date of that statement, and we undertake no obligation, except as required by law, to update any forward-looking statements whether as a result of new information, future events or otherwise and you should not expect us to do so.

Also, our business is subject to a number of significant risks and uncertainties, including our reliance on offshore sourcing, any of which can adversely affect our business, results of operations, financial condition or future prospects. For a discussion of risks and uncertainties that we face, see the Forward Looking Statements detailed above and Item 1A, “Risk Factors” in our 2016 Annual Report.

Investors should also be aware that while we occasionally communicate with securities analysts and others, it is against our policy to selectively disclose to them any material nonpublic information or other confidential commercial information. Accordingly, investors should not assume that we agree with any projection, forecast or report issued by any analyst regardless of the content of the statement or report, as we have a policy against confirming information issued by others.

This quarterly report on Form 10-Q includes our unaudited condensed consolidated financial statements for the thirteen-week period (also referred to as “three months,” “three-month period,” “quarter,” “first quarter” or “quarterly period”) that began February 1, 2016 and ended May 1, 2016.  This report discusses our results of operations for this period compared to the 2016 fiscal year thirteen-week period that began February 2, 2015 and ended May 3, 2015; and our financial condition as of May 1, 2016 compared to January 31, 2016.

References in this report to:

§	the 2017 fiscal year and comparable terminology mean the fiscal year that began February 1, 2016 and will end January 29, 2017; and

§	the 2016 fiscal year and comparable terminology mean the fiscal year that began February 2, 2015 and ended January 31, 2016.

Dollar amounts presented in the tables below are in thousands except for per share data.

The following discussion should be read in conjunction with the condensed consolidated financial statements, including the related notes, contained elsewhere in this quarterly report. We also encourage users of this report to familiarize themselves with all of our recent public filings made with the Securities and Exchange Commission (“SEC”), especially our 2016 annual report on Form 10-K (“2016 Annual Report”) filed with the SEC on April 15, 2016. Our 2016 Annual Report contains critical information regarding known risks and uncertainties that we face, critical accounting policies and information on commitments and contractual obligations that are not reflected in our condensed consolidated financial statements, as well as a more thorough and detailed discussion of our corporate strategy and new business initiatives.

Our 2016 Annual Report and our other public filings made with the SEC are available, without charge, at www.sec.gov and at http://investors.hookerfurniture.com

Nature of Operations

Hooker Furniture Corporation (referred to as “we,” “us”, “our” “Hooker” or “the Company”) is a home furnishings marketing, design and logistics company offering worldwide sourcing of residential casegoods and upholstery, as well as domestically-produced custom leather and fabric-upholstered furniture in our 91^st year of business. Our February 2016 acquisition of  the assets of Home Meridian International positions us as the third largest publically traded furniture source for the U.S. Furniture Market based on 2015 shipments to U.S. retailers, according to a 2016 survey published by Furniture Today, a leading trade publication. Major casegoods product categories include home entertainment, home office, accent, dining, and bedroom furniture in the upper-medium price points sold under the Hooker Furniture brand. Hooker’s residential upholstered seating product lines include Bradington-Young, a specialist in upscale motion and stationary leather furniture, Sam Moore Furniture, a specialist in upscale occasional chairs, settees, sofas and sectional seating with an emphasis on cover-to-frame customization, and Hooker Upholstery, imported leather upholstered furniture targeted at the upper-medium price-range. The Homeware product line offers customer-assembled, modular upholstered and casegoods products designed for younger and more mobile furniture customers. The H Contract product line supplies upholstered seating and casegoods to upscale senior living facilities. Home Meridian’s brands address more moderate price points and channels of distribution not currently served by legacy Hooker Furniture divisions or brands. Home Meridian’s brands include:

§	Pulaski Furniture, specializing in casegoods covering the complete design spectrum: traditional, contemporary, and transitional in a wide range of bedroom, dining room, accent and display cabinets at medium price points,

§	Samuel Lawrence Furniture, specializing in value-conscious offerings in bedroom, dining room, home office and youth furnishings,

§	Prime Resources, value-conscious imported leather upholstered furniture,

§	Right2Home, a supplier to internet furniture retailers and

§	Samuel Lawrence Hospitality, a designer and supplier of hotel furnishings.

Our corporate and divisional offices and upholstery manufacturing facilities are located in Virginia and North Carolina, and we have showrooms in High Point, N.C. and Ho Chi Minh City, Vietnam. We operate eight distribution centers in North Carolina, Virginia, California, China and Vietnam. An extensive selection of designs and formats along with finish and cover options in each of our product categories makes us a comprehensive resource for retailers with price points in the lower-medium to lower high-end price ranges.  Our principal customers are retailers of residential home furnishings that are broadly dispersed throughout the United States. Our customers also include home furniture retailers in Canada and in nearly 40 other countries internationally. Other customers include independent furniture stores, mega accounts, specialty retailers, department stores, catalog and internet merchants, interior designers and national and regional chains.

For financial reporting purposes, we are organized into four operating segments – Hooker Casegoods, Upholstery, Home Meridian and an “All other” segment which includes H Contract and Homeware, two new businesses started in 2014. As of May 1, 2016, our operating segments and their associated brands are as follows:

Hooker Furniture Corporation
Operating Segments
Hooker Casegoods		Upholstery		Home Meridian		All other
Brands:		Brands:		Brands:		Brands:
Hooker Furniture		Bradington-Young		Pulaski Furniture		H Contract
		Hooker Upholstery		Samuel Lawrence Furniture		Homeware
		Sam Moore		Samuel Lawrence Hospitality
				Prime Resources
				Right 2 Home

Overview

Our net sales are derived primarily from the sale of household furniture. Home furnishings sales are driven in large part by general economic factors such as consumer confidence, availability of consumer credit, energy and other commodity prices and housing and mortgage markets and lifestyle-driven factors such as changes in fashion trends, disposable income and household formation and turnover.

Historically, our lower overhead, variable-cost import operations helped drive our profitability and provided us with more flexibility to respond to changing demand by adjusting inventory purchases from suppliers. This import model requires constant vigilance due to a larger investment in inventory and longer production lead times. We constantly evaluate our imported furniture suppliers and when quality concerns, inflationary pressures, or trade barriers, such as duties and tariffs, diminish our value proposition, we transition sourcing to other suppliers, often located in different countries or regions. We expect the recent acquisition of Home Meridian, whose net sales are derived entirely from imported items, to strengthen and perpetuate this model, although at higher volumes and lower margins than that of our legacy import operations.

As a percentage of sales, our domestic upholstery operations have significantly higher overhead and fixed costs than our import operations, and their profitability has been and can be more significantly affected by economic downturns. Our upholstery segment operations have been profitable since fiscal 2013, with overall profitability improving each year, primarily due to improving profitability in our domestic upholstery, which lagged the import operations during the economic downturn, but are now seeing the impact of cost reduction efforts and improving sales on their operations.

Executive Summary-Results of Operations

The Home Meridian acquisition closed on the first day of our most recently completed fiscal quarter. Consequently, that segment’s prior year results are not included in the results discussed below.

Consolidated net sales for the fiscal 2017 first quarter doubled to $121.8 million due primarily to the acquisition of Home Meridian on the first day of fiscal 2017. Net sales in our Hooker Casegoods segment decreased $5.6 million or 14% from the prior year quarter, while we had net sales increases in our All other and Upholstery segments of approximately 53% and 3%, respectively, in each case compared to the prior year fiscal quarter.  Despite the doubling of net sales, net income decreased $972,000 or 28.0% as compared to the comparable prior year period. As discussed in greater detail under “Results of Operations” below, the following are the primary factors that affected our consolidated fiscal 2017 first quarter results of operations:

§

Gross profit. Consolidated gross profit increased primarily due to the acquisition of Home Meridian during the quarter and, to a lesser extent, improved gross profit in our Upholstery and All other operating segments due to increased sales in those segments. These increases were partially offset by decreased gross profit in our Hooker Casegoods segment due to decreased sales. However, as a percentage of net sales, gross margins in the Hooker Casegoods segment increased slightly due primarily to lower ocean freight costs.

§

Selling and administrative expenses. Consolidated selling and administrative (S&A) expenses increased in absolute terms, but decreased as a percentage of net sales primarily due to the addition of Home Meridian’s operations during the quarter. Hooker Casegoods segment S&A expenses increased in absolute terms and as a percentage of net sales despite that segment’s net sales decrease, primarily due to the inclusion of approximately $1.0 million of acquisition-related costs during the quarter.

§	Intangible asset amortization expense. The Home Meridian segment recorded $1.7 million of amortization expense for recently recorded acquisition-related intangibles.

§

Operating income. Consolidated operating income decreased $1.2 million primarily due to decreased Hooker Casegoods segment operating income which was partially offset by the addition of Home Meridian’s operations during the quarter and increased All other and Upholstery segment operating income, all due to the factors discussed above and in greater detail in the analysis below.

Results of Operations

The following table sets forth the percentage relationship to net sales of certain items included in the condensed consolidated statements of income included in this report.

		Thirteen Weeks Ended
		May 1,				May 3,
		2016				2015
Net sales			100.0	%			100.0	%
Cost of sales			78.2				73.1
Gross profit			21.8				26.9
Selling and administrative expenses			17.2				18.3
Intangible asset amortization			1.4				-
Operating income			3.3				8.6
Other income, net			0.1				0.2
Interest expense, net			0.2				-
Income before income taxes			3.2				8.8
Income tax expense			1.1				3.1
Net income			2.1				5.7

Review

Our Upholstery and All other segments delivered encouraging results for the quarter. After struggling for much of fiscal 2016, the Hooker Upholstery division posted double-digit net sales gains during the quarter as a result of an expanded product line and efforts to improve Hooker Upholstery’s value proposition. Despite a net sales decrease in the single digits due to exiting low or unprofitable sales in the prior-year, Sam Moore reported an operating income improvement of nearly 50% after achieving its first profitable year, since 2006, in fiscal 2016. H Contract reported an 82% increase in net sales and a three-fold improvement in operating income compared to the prior year. While Homeware’s net sales are down compared to prior year due to sourcing delays related to its new imported product line, its operating loss decreased by over 70% from the prior year due primarily to improved gross profit and lower S&A expenses. We will continue to assess Homeware’s operating performance as these new, better-value product offerings become available to ship.

 

		Net Sales
		Thirteen Weeks Ended
		May 1, 2016								May 3, 2015								$ Change				% Change
						% Net Sales								% Net Sales
Hooker Casegoods		$	32,929				27.0	%		$	38,483				63.1	%		$	(5,554	)			-14.4	%
Upholstery			21,893				18.0	%			21,303				34.9	%			590				2.8	%
All Other			2,033				1.7	%			1,332				2.2	%			701				52.6	%
Intercompany Eliminations			-								(162	)							162
Total excl. Home Meridian			56,855				46.7	%			60,956				100	%			(4,101	)			-6.7	%
Home Meridian			64,976				53.3	%			-				0.0	%			64,976
Consolidated			121,831				100	%			60,956				100	%			60,875				99.9	%

Unit Volume		FY17 Q1 % Increase vs. FY16 Q1				Average Selling Price		FY17 Q1 % Increase vs. FY16 Q1
Hooker Casegoods			-16.3	%		Hooker Casegoods			3.0	%
Upholstery			-0.6	%		Upholstery			3.9	%
All Other			12.0	%		All Other			32.2	%
Total excl. Home Meridian			-10.8	%		Total exclu. Home Meridian			4.9	%
Home Meridian			-			Home Meridian			-
Consolidated			-10.8	%		Consolidated			4.9	%

The increase in consolidated net sales was primarily due to the acquisition of Home Meridian on the first day of the fiscal 2017 first quarter and, to a lesser extent, net sales increases in our All other and Upholstery segments. Sales increases in our All other segment are primarily due to increased sales at H Contract as that business continues to expand its customer and geographic bases. Upholstery segment increases were driven by increases at Hooker Upholstery, primarily a result of efforts to improve that line’s product assortment and value proposition. These increases were partially offset by decreased Hooker Casegoods segment sales. We believe Hooker Casegoods segment sales decreased primarily due to sluggish retail furniture sales, a trend which began in the second half of fiscal 2016 and one that seems generally consistent with that of the overall home furnishings industry.

 

		Gross Income and Margin
		Thirteen Weeks Ended
		May 1, 2016								May 3, 2015								$ Change				% Change
						% Net Sales								% Net Sales
Hooker Casegoods		$	10,154				30.8	%		$	11,301				29.4	%		$	(1,147	)			-10.1	%
Upholstery			5,076				23.2	%			4,718				22.1	%			358				7.6	%
All Other			656				32.3	%			351				26.4	%			305				86.9	%
Intercompany Eliminations			3								5								(2	)
Total excl. Home Meridian			15,889				27.9	%			16,375				26.9	%			(486	)			-3.0	%
Home Meridian			10,710				16.5	%			-							$	10,710
Consolidated		$	26,599				21.8	%		$	16,375				26.9	%		$	10,224				62.4	%

Consolidated gross profit increased in the fiscal 2017 first quarter, primarily due to:

§	the acquisition of Home Meridian on the first day of the fiscal 2017 first quarter;

§	improved upholstery segment gross profit due to increased sales and operating efficiencies; and

§	improved All other segment gross profit due to increased sales at H Contract.

These increases were partially offset by decreased Hooker Casegoods gross profit in absolute terms due to lower net sales; however, Hooker Casegoods segment gross profit as a percentage of net sales increased to 30.8% from 29.4%, due primarily to lower ocean freight costs.

		Selling and Administrative Expenses
		Thirteen Weeks Ended
		May 1, 2016								May 3, 2015								$ Change				% Change
						% Net Sales								% Net Sales
Hooker Casegoods		$	8,073				24.5	%		$	7,200				18.7	%		$	873				12.1	%
Upholstery			3,313				15.1	%			3,271				15.4	%			42				1.3	%
All Other			590				29.0	%			662				49.7	%			(72	)			-10.9	%
Total excl. Home Meridian			11,976				21.1	%			11,133				18.3	%			843				7.6	%
Home Meridian			8,968				13.8	%			-								8,968
Consolidated		$	20,944				17.2	%		$	11,133				18.3	%		$	9,811				88.1	%

 

Consolidated S&A expenses increased in absolute terms primarily due to the addition of Home Meridian’s operations during the quarter, but decreased as a percentage of net sales from the fiscal 2015 first quarter, primarily due to the addition of the that segment’s net sales in the quarter. Hooker Casegoods segment S&A increased primarily due to approximately $1.0 million in acquisition-related expenses during the quarter, partially offset by decreased sales-related expenses due to lower sales.

		Intangible Asset Amortization
		Thirteen Weeks Ended
		May 1, 2016								May 3, 2015								$ Change				% Change
						% Net Sales								% Net Sales
Home Meridian
Intangible asset amortization		$	1,654				1.4	%		$	-				0.0	%		$	1,654

The Home Meridian segment recorded amortization expense on acquisition-related intangibles during the quarter and expects to record an additional $1.4 million during the remainder of fiscal 2017. See note 9. “Intangible Assets” for additional information on our amortizable intangible assets.

		Operating Profit and Margin
		Thirteen Weeks Ended
		May 1, 2016								May 3, 2015								$ Change				% Change
						% Net Sales								% Net Sales
Hooker Casegoods		$	2,081				6.3	%		$	4,101				10.7	%		$	(2,020	)			-49.3	%
Upholstery			1,763				8.1	%			1,447				6.8	%			316				21.8	%
All Other			67				3.3	%			(311	)			-23.3	%			378				-121.5	%
Intercompany Eliminations			2								5								(3	)
Total excl. Home Meridian			3,913				6.9	%			5,242				8.6	%			(1,329	)			-25.4	%
Home Meridian			88				0.1	%			-								88
Consolidated		$	4,001				3.3	%		$	5,242				8.6	%		$	(1,241	)			-23.7	%